Amazon Drops Seattle Office Project Citing Business Tax

The so-called head tax aimed at businesses operating in city limits was enough for the online retail giant to back out of a prominent downtown office project. The decision comes just weeks after the company said it would not locate its second headquarters in New York City.

by Benjamin Romano and Mike Rosenberg, The Seattle Times
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February 28, 2019

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(TNS) — Amazon is abandoning a prominent downtown Seattle office project 10 months after it threatened to do so if the city imposed a new business tax.

While the Seattle City Council ultimately reversed itself on the so-called head tax, Amazon confirmed Wednesday it will not occupy the 722,000 square feet of space it had leased in the Rainier Square tower under construction at Fifth Avenue and Union Street. The company did resume construction on another high-rise it had paused as part of last May’s threat.

“We are always evaluating our space requirements and intend to sublease Rainier Square based on current plans,” Amazon said in a statement, adding that the company has more than 9,000 open jobs and 2 million square feet of new space under construction in Seattle, and that “it will continue to evaluate future growth.”

The Amazon executives doing those evaluations exit February with much more to consider than when they entered the month. Meanwhile, the company’s growth in Seattle and relationship with the city will likely figure prominently in the upcoming City Council election season.

Changing plans

On Valentine’s Day, Amazon abandoned its plans for a major campus in New York City, which would have accommodated up to 25,000 employees as it was built over several years. (It has upward of 2,000 people working in the city in areas including advertising, fashion and publishing.)

The company said it would spread those jobs across several other North American tech hubs where it has offices, but indicated no immediate plans to accelerate growth in Seattle as a result of its false start in New York. Nor did it indicate it would restart its HQ2 search process, the yearlong sweepstakes it launched in 2017 that yielded in November a split decision with New York and Northern Virginia tapped for huge new offices.

Now, in addition to seats for 25,000 would-be New York employees, Amazon — if its growth trajectory holds — would need to find space for thousands more who would have worked in downtown Seattle.

At 722,000 square feet, the Rainier Square lease was one of the biggest in Seattle history. It provided room for at least 3,500 employees, and perhaps up to 5,000.

Amazon had previously secured two large spaces in downtown Bellevue, its original hometown, enough to accommodate 4,500 people. The Puget Sound Business Journal reported this month that the company is looking to expand even more in Bellevue, although Amazon has not commented on its Eastside plans. Other big tech companies in the region maintain locations on both sides of Lake Washington to tap talent in the city and its suburbs.

Seattle real-estate impact

Scheduled to open next year, the $570 million Rainier Square tower project will be the second-tallest building in the Pacific Northwest, at 58 stories. It also will include luxury apartments and a hotel, as well as a PCC Community Markets on the ground floor.

Even by Amazon’s standards, the office commitment was huge: Only a few companies — Starbucks, Google and Facebook — have more office space in Seattle altogether than Amazon was planning to occupy in Rainier Square.

In addition to its size, Rainier Square represented a bit of a departure for Amazon, which has about 40 buildings and 45,000 employees in South Lake Union and the Denny Triangle, to venture south toward downtown.

The impact the pullout will have on the local office market is mixed: On one hand, it’s a ton of space to fill, and likely too big for any one company to take. But on the other hand, the office market — unlike the cooling residential real-estate market — is overheated with demand from companies.

Colliers International released a report Wednesday showing the vacancy rate in downtown Seattle is 7.1 percent — only Manhattan and the Bay Area had tighter markets, among major metro areas. Office rents for top-tier Class A properties downtown, like Rainier Square, have also been rising as companies like Google, Facebook and WeWork continue to snatch up large amounts of space.

Seattle’s economic base is much broader than it was in 2007, the last time a similarly large chunk of top-tier space came on the market unexpectedly. When Washington Mutual — then Seattle’s biggest office tenant — went under and vacated 1.2 million square feet in the city, it “kind of imploded our market,” said David Gurry, senior vice president of Colliers in downtown Seattle.

“It’s my opinion that 720,000 square feet of space will really have an insignificant impact on the market,” Gurry said. “There’s enough demand from companies in the city of Seattle and those moving in from places like Silicon Valley that I think it’ll get gobbled up pretty quickly.”

The stakes for Amazon to sublease the space are significant, even for a company that made an $11.2 billion profit last year. The company doesn’t release its lease terms, but leases for new buildings in Seattle typically last 10 to 15 years. When Amazon signed its Rainier Square lease in fall 2017, rents in downtown were about $42 per square foot a year. Based on that, its total rent bill for the building would be in the neighborhood of $30 million a year, or $300 million over a typical 10-year lease.

Gurry said it’s possible a sublease deal could even be slightly profitable for Amazon and Seattle-based Wright Runstad & Co., the tower’s builder and owner. Office rents have risen about $5 per square foot in the year and a half since Amazon’s original lease, so it could make a small profit — likely split 50/50 between Amazon and Wright Runstad — if it is able to sublease the full space.

Greg Johnson, president of Wright Runstad, said he couldn’t say why Amazon pulled out of the building and if it’s tied into any larger threads about the company’s future here.

“It’s a relatively small part of what they occupy in the region, so I wouldn’t necessarily try to read that much into it,” Johnson said, noting subleasing goes on pretty frequently in Seattle.

While signing a single, noteworthy company before the project broke ground was a win for Wright Runstad, he said it will still be a success if another strong company or group of tenants ultimately fills the building, which he expects to be the case.

“We wish (Amazon) well and hope it’s super successful” in subleasing the space, Johnson said. “I think the good news for Amazon is we’re in a very robust market and there’s other people and companies out looking for space, and there isn’t much available. I think they’re going to fill it up pretty quickly.”

Relationship with City Hall

Questions swirled around Amazon’s presence in Seattle even before the fight over the head tax and the announcement of a public courting of other cities for a so-called HQ2.

Rightly or wrongly, blame for the city’s worsening traffic, affordability and homelessness has been laid at the feet of the nearly 25-year-old tech and commerce giant, whose outsize growth made it an easy target.

Amazon’s decision in 2007 to consolidate its Seattle presence in an urban corporate campus in the South Lake Union neighborhood ushered in a decade of rapid change and the arrival of tens of thousands of high-paying jobs in technology and associated fields. Other major tech firms such as Facebook and Google followed Amazon into a neighborhood of old warehouses and commercial laundries that was redeveloped en masse by the late Paul Allen’s Vulcan Real Estate.

The tech boom here overlapped with a marked increase in homelessness, which was declared an emergency in the city in 2015, leading some City Council members last spring to propose a per-employee head tax on high-grossing businesses.

In response, Amazon said it would pause construction planning on an office high-rise known as “Block 18” and consider subleasing its space in the Rainier Square tower. The threats spooked the city’s construction-worker unions, which split with service-worker unions that were supporting the tax.

When Mayor Jenny Durkan and a council majority sought to compromise with business leaders in May by passing a smaller version of the tax, Amazon announced it would move ahead with Block 18, one of several new buildings going up in the Denny Triangle. But the company never recommitted to the Rainier Square space, even after an effort to nix the measure through a referendum, backed by Amazon and other local businesses, pressured the council into repealing the tax less than a month later.

The annual tax of $275 per employee on companies grossing at least $20 million per year would have raised about $47 million in 2019 for low-income housing and homeless services. Kshama Sawant, one of two council members who opposed the repeal, described Amazon’s Rainier Square announcement Wednesday as a “told you so” moment.

“This is a good reminder for us that backing down to the bullying of corporations never stops their bullying,” said Sawant, praising activists in New York City who protested tax breaks for Amazon, causing the company to pull out from its campus plans there. (Two Seattle council members, Teresa Mosqueda and Lisa Herbold, spoke at a New York event organized by Amazon opponents in January.)

“As the next step, people in Seattle should gather courage and renew our fight to tax big business for social housing,” Sawant said.

Sawant’s colleagues showed little appetite to revisit the matter last fall as they and Durkan drew up a new budget. But the council that reversed itself last June will soon look very different.

Seven of nine seats are up for grabs this fall, and four incumbents already have decided not to seek re-election. Sawant is running again, and the head tax and Seattle’s relationship with Amazon and the still-growing tech sector likely will be hot topics in many races.

“Whether or not this building is occupied by Amazon workers, we have a housing crisis. We have transportation issues,” said Mosqueda, who also opposed the head-tax repeal and whose seat isn’t up for election until 2021.

“We would welcome workers from Facebook, or Google, or Apple, just like we would welcome workers from Amazon,” Mosqueda added. “But we still don’t have as much housing as we need, and we still need to double-down on our investments.”

Durkan’s office issued a brief statement late Wednesday about the strength of the city’s economy and its attractiveness to employers, but did not address specific questions about Amazon’s decision.

An Amazon spokesman said two weeks ago that its buildings under construction in Seattle would bring its total in the city to 14 million square feet, which “will be the completion of our Seattle campus.” The spokesman later backpedaled and issued a statement saying only that the company “will continue to evaluate future growth” in Seattle — the stance reiterated Wednesday — and declined to comment further.

The company has had a steady number of job openings in the city — about 9,800 as of Wednesday, though it’s unclear how many of those are for expansions in the city rather than hiring as part of regular turnover. Amazon has been saying since last fall that it has 45,000 employees in the city, up from 40,000 in March 2018.

Mosqueda said the Rainier Square news isn’t a sign that Seattle is a bad place for Amazon to do business.

“They’re on track to reach 50,000 employees here,” she said. “This is a city that not only welcomed them in but helped them succeed. For that success to now be sustainable, we have to get on the same page about investments in housing, transit and infrastructure.”

Amazon’s statement Wednesday follows the publication of a marketing flyer posted earlier by technology news site GeekWire showing that the Rainier Square space was on the market.

(Seattle Times staff reporter Daniel Beekman contributed to this report.)

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